California governor signs online sales tax law

The new law requires online retailers to collect tax starting next year.

California Gov. Jerry Brown today signed a law that requires large online retailers to begin collecting sales tax from state residents next year, unless a new federal law preempts it. The law covers retailers doing $500,000 or more a year in online sales to California residents.

The state legislation, AB 155, is tied to an agreement between California legislators and Amazon.com Inc. The new law supersedes an earlier measure enacted in June that would have required online retailers to immediately begin collecting sales tax from state residents if the merchants did business with in-state affiliate web sites such as blogs.

The earlier law, by contending that affiliate web sites amounted to an in-state physical presence for online retailers, would have effectively given the state a way around existing federal law, which allows states to mandate sales tax collection only by merchants with an in-state physical presence, which can also include stores and distribution centers. Amazon and other retailers cut their ties with affiliate web sites after passage of that first law.

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In subsequent negotiations with Amazon, California agreed to postpone its own requirement of sales tax collection until next year. In return, Amazon has pledged to build distribution centers in the state, creating at least 10,000 new full-time jobs and hiring 25,000 seasonal workers by the end of 2015. Amazon also has agreed to lobby for a new federal law that would authorize states to mandate tax collection by online retailers whether or not they had an in-state physical presence. The authorization would apply to all states that have simplified sales tax collection as part of the Streamlined Sales Tax Project, or SST.

“We’re grateful to Gov. Brown and the legislature’s bipartisan leadership for this win-win law,” says Paul Misener, Amazon’s vice president, global public policy. “We’re excited that we now can create 10,000 jobs and cause $500 million in investment in California in addition to reinstating our California-based affiliates. We’re committed to working with Congress, retailers and the states to pass federal legislation as soon as possible and as analysts have noted, we’ll continue to offer customers the best prices, regardless of whether sales tax is charged.”

Such federal legislation has been introduced in Congress several times over the past decade, but never managed to win much support. But the bill in the current Congress introduced by Sen. Dick Durbin, the Senate’s second-ranking Democrat, should benefit from the new law in California, a state whose actions other states follow closely, tax experts say. “We believe this adds momentum for a national solution,” says Scott Peterson, executive director of the SST, which has more than 20 states as members.

The new state law also will remove from the state ballot next year a referendum that Amazon had promoted to give residents the chance to vote down the prior tax law. Proponents of the new law also say it will help provide a more equitable tax policy among bricks-and-mortar and web-only retailers.

“This landmark legislation not only levels the playing field between online retailers and California’s brick-and-mortar businesses, it will also create tens of thousands of jobs and inject hundreds of millions of dollars back into critical services like education and public safety in future years,” says Brown, a Democrat. “It’s time for Washington to follow our lead and forge a bipartisan national solution.”

A state trade group for store retailers agrees. “This is a major victory for bricks-and-mortar businesses in this state,” says Bill Dombrowski, CEO of the California Retailers Association. “Amazon's concession to finally begin collecting sales tax in California is a groundbreaking moment that sends a strong message to Washington that it is time to stop giving special treatment to a select few.”